Comovement Revisited

53 Pages Posted: 19 Jun 2015

See all articles by Honghui Chen

Honghui Chen

Department of Finance, University of Central Florida

Vijay Singal

Virginia Tech

Robert Whitelaw

New York University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 5, 2015

Abstract

Recent evidence of excessive comovement among stocks following index additions (Barberis, Shleifer, and Wurgler, 2005) and stock splits (Green and Hwang, 2009) challenges traditional finance theory. Based on a simple model, we show that the bivariate regressions relied upon in the literature often provide little or no information about the economic magnitude of the phenomenon of interest, and the coefficients in these regressions are very sensitive to time-variation in the characteristics of the return processes that are unrelated to excess comovement. Instead, univariate regressions of the stock return on the returns of the group it is leaving (e.g., non-S&P stocks) and the group it is joining (e.g., S&P stocks) reveal the relevant information. When we reexamine the empirical evidence using control samples matched on past returns and compute Dimson betas, almost all evidence of excess comovement disappears. The results in the literature are consistent with changes in the fundamental factor loadings of the stocks. One key element to understanding these striking results is that, in both the examples we study, the stocks exhibit strong returns prior to the event in question. We document the heretofore unknown empirical regularity that winner stocks exhibit increases in betas. Thus, much of the apparent excess comovement is just a manifestation of momentum.

Keywords: market efficiency, non-fundamental comovement, asset class demand, time-varying betas

JEL Classification: G14

Suggested Citation

Chen, Honghui and Singal, Vijay and Whitelaw, Robert F., Comovement Revisited (June 5, 2015). Available at SSRN: https://ssrn.com/abstract=2619736 or http://dx.doi.org/10.2139/ssrn.2619736

Honghui Chen

Department of Finance, University of Central Florida ( email )

PO Box 161400
Orlando, FL 32816
United States
407-823-0895 (Phone)

Vijay Singal

Virginia Tech ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States
5402317750 (Phone)

Robert F. Whitelaw (Contact Author)

New York University ( email )

Stern School of Business
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New York, NY 10012-1126
United States
212-998-0338 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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